Legal privilege in the wake of corporate scandals

Legal privilege, or attorney-client privilege, is a principle well established in common law countries, especially in Canada and the U.S. However, transnational business, new work methods and recent financial scandals have altered its importance. This three-article series will clarify where we stand today with respect to the protection of legal privilege by focusing on the following issues: Legal privilege in the wake of corporate scandals; legal privilege applied to modern litigation, with an emphasis on e-discovery; and the influence and impact of Europe’s views on legal privilege.

Under most common law theories of evidence, legal privilege can be broadly defined as the right to refuse to disclose, or to prevent another person from disclosing, confidential information exchanged between a client and his or her attorney. Over time, this long-established principle has become a key weapon in litigating cases in the U.S. and Canada.

Recently, however, in light of multiple corporate scandals, trust in corporate responsibility has been undermined and as a result perceptions of privilege have changed. What impact did those scandals have on legal privilege? Have they weakened this privilege in any way?

Legal Privilege, the Cornerstone of the Common Law Legal System

Legal privilege dates back to the early 16th century. By giving a person the right to refuse to disclose confidential information exchanged with a lawyer, legal privilege allows for the full and frank exchange of information. This exchange is undoubtedly necessary to ensure effective legal representation and to promote the fair and equitable administration of justice.

The perception of legal privilege has steadily evolved over time. It exists now as a defense tactic in the litigation process and, in fact, has transitioned from being a simple privilege per se to an actual right under the law. In fact, it is now considered a quasi-constitutional right in Canada (Privacy Commissioner of Canada v. Blood Tribe Department of Health)

This transition nonetheless came into question in the late 1990s/early 2000s after multiple U.S. corporate scandals hit the headlines, putting corporate management under greater scrutiny. Soon after, the need for greater corporate responsibility led the U.S. government to reinforce its prosecution task force by giving it greater resources to investigate corporate criminal activities in a more efficient manner, which included legal mechanisms to procure documents once protected under legal privilege by incentivizing those under investigation to waive their privilege.

Disclosure of Privileged Information and Cooperation: A Questionable Association

The Department of Justice (DOJ) first started reinforcing its position on legal privilege in 1999, when it clearly expressed in a memorandum that “a corporation’s willingness to waive attorney-client… privilege” should be seen and construed as the willingness of the company to cooperate with the DOJ, such cooperation being one essential criterion to take into account when deciding whether to prosecute a company.

The Securities and Exchange Commission (SEC) then adopted a similar point of view in 2001, when it included waiver of privilege in the examples of cooperation. It did not take long before other federal agencies imitated the trend.

The DOJ and SEC put intense pressure on corporations to disclose their privileged attorney-client communications, under the threat that any refusal would be considered suspicious and would likely lead to prosecutions. Corporate counsel found themselves in a delicate position: They had to consider and weigh the risks of breaching professional and fiduciary duties owed to the company against facing criminal investigations.

The federal agencies’ positions and guidelines definitely compelled many companies to disclose privileged documents in the face of pending investigations. Many hoped to mitigate the consequences of disclosure by signing confidentiality agreements with the prosecutors in an effort to prevent third parties from trying to seek this privileged information through discovery. However, the fate of what is now called the “selective waiver” is highly uncertain. While some courts have agreed to consider the “selective waiver” as protecting the information from disclosure to third parties, most of them have rejected this interpretation.(In re Qwest Communications Int’l, Inc. Sec. Litig).

Considering that companies conduct business in a similar fashion in both Canada and the U.S., it would not be unreasonable to assume that Canadian courts may follow a similar path. Let us hope they do not, as there is no shortage of criticism when it comes to discussing how U.S. prosecutors have treated legal privilege in the past year.

Pressuring companies into waiving this right is highly questionable. Moreover, undermining legal privilege has the negative effect of destabilizing the trust that corporations build with their attorneys. Whereas the legal privilege principle was originally established to ensure clients could speak openly to their lawyers in order to receive candid advice, they may now be tempted to withhold relevant information. Sound legal advice can only be given if the lawyer is fully informed of the situation by clients—hence the criticism by many in the legal community of the government’s use of waivers with respect to legal privilege.

The End of the “Culture of Waiver”?

This criticism has undoubtedly caused U.S. governmental agencies to rethink the way they have treated legal privilege, and some of them have even tried to take a step back.

In 2008, for example, the DOJ expressly prohibited its prosecutors from requesting, to some extent, a waiver of legal privilege. Instead, it asks investigators to accept notes, memos and presentations in lieu of demanding waivers to privilege. The SEC and other agencies followed the DOJ’s example and reaffirmed the need to respect privileged communications during investigations. But habits can be difficult to undo: the SEC guidelines still contain provisions aimed at pressuring companies to “voluntarily” waive privilege, and we are still far from protecting legal privilege outright. A solution would likely come from a comprehensive piece of congressional legislation that would apply to every single federal agency. The American Bar Association has called for such legislation, but to date, attempts to enact any regulations have failed.

Because legal precedence is particularly important in common law jurisdictions, we can only hope that the courts will keep finding justifications to overcome the effect of the “culture of waiver” on legal privilege. Unfortunately, courts do not necessarily take consistent positions, and this precarious situation has damaging effects on the way the U.S. legal system is perceived. Ironically, this is exactly what the government wanted to avoid when enforcing investigation guidelines after the corporate scandals.